Bath & Body Works, Inc. (BBWI) Q3 2014 Earnings Report, Transcript and Summary

Good day. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the L Brands Third Quarter 2014 Earnings Call. [Operator Instructions] Thank you. I will now turn the call over to Ms. Amie Preston, Chief Investor Relations Officer for L Brands. Please go ahead.

Thank you, Carmen, and good morning, everyone, and welcome to L Brands third quarter earnings conference call for the period ending Saturday, November 1, 2014. As a matter of formality, I need to remind you that any forward-looking statements we may make today are subject to our safe harbor statement found in our SEC filings. Our third quarter earnings release and related financial information are available on our website, www.lb.com. Also available on our website is an investor presentation, which we will be referring to during this call. Stuart Burgdoerfer, EVP and CFO; Sharen Turney, CEO, Victoria's Secret; Nick Coe, CEO, Bath & Body Works; and Martin Waters, President of International, are all joining us today. After our prepared comments, we'll be available to take your questions for as long as time permits. [Operator Instructions] Thanks, and now I'll turn the call over to Stuart.

Thanks, Amie, and good morning, everyone. Our third quarter results were very solid and represented a record for the company. Total sales increased 7%. Comps increased 5% on top of the 3% increase last year. And operating income dollars increased 35%. Earnings per share increased 42% to $0.44 versus $0.31 last year. As you know, holiday in the fourth quarter are critical, representing over half of our earnings for the year. While we have momentum in our business and we are well positioned, last holiday was challenging. Therefore, we remain focused on the execution of retail fundamentals, and we will continue to manage the business with discipline. Turning to our third quarter results in more detail. Total sales increased 7% to $2.319 billion and comps increased 5%. The gross margin rate increased by 130 basis points to 40.8% driven by an increase in the merchandise margin rate and slight buying and occupancy leverage. The SG&A rate improved by 110 basis points to 28.6%. Operating income dollars increased by 35% driven by our growth in all 3 of our major segments, and our operating income rate increased by 260 basis points to 12.3%. Earnings per share increased 42% to $0.44. Turning to the balance sheet on Page 8. Retail inventories per square foot at cost ended the quarter down 12% versus last year. We are very comfortable with our inventory position. They are clean and in good shape. Turning to Page 11 of the presentation. Our guidance for the fourth quarter is consistent with our prior view. As previously announced, our full year forecast includes a negative impact of about $0.10 to $0.12 from the exit of certain apparel merchandise and makeup and about $0.05 of incremental nonoperating expense, primarily interest, for a total of $0.15 to $0.17 of pressure. Importantly, we expect a more significant impact from the exit of apparel at Victoria's Secret Direct in the fourth quarter. We have sold through the majority of this product, so the magnitude of the sales decline will increase in the fourth quarter. Whereas direct sales increased by 2% in the third quarter, our expectation is that sales will decrease in the high-single-digit range in the fourth quarter, which will negatively impact earnings per share by about $0.05. For the fourth quarter, we expect earnings per share between $1.61 and $1.71 against last year's $1.65 result. Our fourth quarter earnings forecast reflects a low-single-digit comp increase. We expect fourth quarter gross margin rate to increase, primarily driven by an improvement in the merchandise margin rate. And we also expect the SG&A rate to increase, primarily driven by a forecasted increase in incentive compensation as last year's payout was below target. Nonoperating expenses, consisting primarily of interest expense, are projected at about $80 million in the fourth quarter. Our projected tax rate is 38%, and our weighted average shares outstanding are forecasted at about 299 million. We expect to end the fourth quarter with inventory per square foot down in the mid- to high-single-digit range to last year. For the full year, we are projecting positive low-single-digit comps. Total sales growth will be about 2 points higher than comps due to growth in square footage in our international business. We expect our full year gross margin rate to be up to last year and the SG&A rate to be about flat to last year. Assuming all of these inputs, we expect earnings per share for the full year 2014 to be between $3.21 and $3.31 per share. We are projecting a 2014 CapEx of about $750 million. As you know, about 70% of our CapEx budget is for real estate and stores. The remainder relate to investments in technology, logistics and facilities. As detailed on Page 12 of the presentation, Victoria's Secret's square footage in North America will increase by just over 5% this year driven by expansions of existing VS stores and the opening of 33 new PINK stores and 20 new Victoria's Secret stores. Total company square footage will increase by about 3.5%. Turning to liquidity. We expect 2014 operating cash flow of $1.5 billion to $1.6 billion and free cash flow of about $750 million to $850 million. We remain committed to returning excess cash to shareholders through a combination of share repurchases and dividends. Our free cash flow and cash position, along with the additional availability under our revolving credit facility, results in very strong liquidity, which is more than sufficient to fund our working capital, capital expenditures, dividends and any other foreseeable needs. Thanks. And now I'll turn the discussion over to Sharen.

Thank you, Stuart, and good morning, everyone. Our third quarter results are detailed on Page 14 of your presentation material. The Victoria's Secret segment grew both sales and operating income in the third quarter. Total sales increased 6%, and comp sales increased 3% on top of 4% last year with operating income increasing $40.7 million, or 27%, and our operating income rate increased 220 basis points. Merchandise margin dollars and rate for the segment increased with the strength in the stores channel offsetting the impact of discontinued apparel merchandise in the direct channel. We also finished the quarter with inventories down double digit to last year. Now let me give you a recap of each channel, starting with the stores. In the stores channel, third quarter sales increased 7% and comps were up 3%. Operating income increased over 30%. Sales growth was driven by lingerie and PINK. Our Beauty business was down from last year, reflecting the impact of the exiting the makeup category. We were very focused on our core categories, and therefore, have had solid momentum in bras, panties and fragrance complemented by strong growth in PINK loungewear and Sport. The store's merchandise margin rate increased during the quarter. We continue to focus on the fundamentals of frugal expense and inventory management. As a result, SG&A expense leveraged versus last year while buying and occupancy held flat. Now turning to direct. Our third quarter results reflect our strategy to exit noncore apparel category. Third quarter sales were up 2%. The merchandise margin rate was down and the operating income rate declined slightly. Merchandise margin dollars and operating income dollars were roughly flat to last year. Our strategy to distort the direct channel to core categories where we have our best growth opportunities is working. Collectively, sales in bras, panties, PINK, Sport, beauty and lounge were all up in mid-teens, and the merchandise margin rate increased during the quarter. These results were partially offset by the exit of non-go-forward apparel merchandise. As we transition to the fourth quarter, we are excited about our upcoming launches and product offerings. We have strong assortment still with both self-purchase and gifting opportunities for the holiday, and we are looking forward to providing our customers with excellent in-store and online experiences. However, as Stuart mentioned earlier, we have sold through the majority of our noncore apparel in direct. As a result, we expect to see a high-single-digit sales decline in direct in the fourth quarter. Following Black Friday weekend, we are very excited for the Victoria's Secret Fashion Show, which will be held in London this year and will air on December 9, featuring musical performances by Taylor Swift, Ed Sheeran, Ariana Grande and Hozier. In summary, we are pleased with our performance in the third quarter. We know that the majority of the season is ahead of us. Therefore, while we are cautiously optimistic, we know that we must remain intensely focused on our customer and execute the fundamentals in order to deliver our goals. Thank you. And now I will turn the discussion over to Nick.

Thanks, Sharen, and good morning, everyone. At Bath & Body Works, we were pleased with our third quarter results where we were able to grow sales and increase earnings versus our record performance last year while effectively managing inventory levels about flat to last year. Total sales for the quarter were $650 million, up 9%, or $53 million, to last year. Comps increased 7% on top of 2% last year. The overall assortment to shop activity was able to drive sales growth in a competitive retail environment. We continue to be pleased with our -- with the customers' acceptance of product newness across our 3 key businesses: our Signature Collection product line, the soap and sanitizer business, and our home fragrance assortment. For the quarter, operating income was $93 million, up 30% from last year. Operating income as a percentage of sales was 14.2% in the quarter and was up 230 basis points to last year driven by expense leverage and improvements in merchandise margin rates. We were also pleased with the performance of the BBW Direct channel during the quarter. Total sales were up 16%, and operating income grew significantly versus last year. Looking ahead to the fourth quarter, we're excited about our holiday assortment and are confident in our approach following a disappointing fourth quarter last year. We will leverage our read-and-react capabilities, provide a world-class in-store experience, and reestablish ourselves as the Christmas destination by celebrating the moment better through the floor sets and activities. We will flow [ph] newness throughout the quarter, beginning this month with our newest signature fragrance launch, A Thousand Wishes, along with new seasonal fragrances in our 3 key businesses. Our inventories are well positioned heading into the quarter and are flexible enough to react to customers' preferences. Expenses are well managed, but we will continue to take the appropriate investments to drive growth in our business. With that, I'll turn the discussion over to Martin.

Thanks, Nick, and good morning, everyone. Turning to our international segment, we continue to be pleased with our results and progress. Reported revenue increased by 34% to $80 million, and operating income increased 60% to $16.1 million. The operating income rate increased to 20.1%. You'll recall that results in this segment include both our wholly owned U.K. business, and the majority is in our franchise models in other geographies. At Victoria's Secret International, we continue to be pleased with performance of our full assortment stores. In the U.K., our London flagship store on Bond Street continues its exceptional performance, and we've begun construction to expand the store. Our 8 mall locations are also doing well, and we'll be opening one more store this year in the U.K. Elsewhere in the world, the 8 stores under our Alshaya partnership continue to do very well, and we'll be opening another 7 stores this year across the Middle East region. Our Victoria's Secret Beauty and Accessories business continues to progress well, and we ended the quarter with 245 stores open, and we're on schedule for just under 300 stores by the end of 2014. We're also on track to open 9 VSBA stores in China in January. And as a reminder, all of our VSBA stores are franchised. In Bath & Body Works International, we are now up to 67 stores outside of North America, again, all franchised. We continue to be very pleased with performance of the business and will open another 18 stores this year. It's peak season right now, so we're focused on store execution. That's all from international. With that, I'll say thank you, and I'll turn it back over to Amie.

Thanks, Martin. That concludes our prepared comments. And at this time, we'd be happy to take your questions. [Operator Instructions] And with that, I'll turn it back over to Carmen.

[Operator Instructions] And your first question comes from the line of Jennifer Davis with Buckingham Capital.

I was wondering if you could talk a little bit more about the Bond Street store. Can you remind us when you started construction there? And is it having any impact on the margins in your international division and when you expect it to open?

Yes, I'll take that one. So we started construction about 3 months ago. Is it having an impact on business? Not much. We have some holdings up inside the store, which have meant that we've had to give over some space to the construction project. But most customers wouldn't notice the difference. There are a few less fitting rooms, but it's not really noticeable to the human eye. Does it have an impact to our margin? No, but we did take some accelerated depreciation, nothing particularly significant. The new space will open at 3 separate times. The first amount of space will come to us just before Christmas this year, then we'll get another amount in early spring and then the final reveal will be sometime around April or May of 2015.

Thanks, Martin. Thanks, Jennifer.

Your next question comes from the line of Ike Boruchow with Sterne Agee.

I'm not sure who I'd direct the question to. But my question will be on the VS Direct side. Understand the exiting of certain businesses impacts the sales for Q4. How should we think about how the trajectory of VS Direct into the first half of next year, the go-forward categories are growing nicely, but when do we finally get clean -- clean enough to really see that number go in the right direction? And also how do we think about international opportunity with e-commerce kind of ramping up as well?

Ike, it's Sharen. Thank you very much. We will continue to go up against the non-go-forward apparel business all through this spring season. So we will -- and we will not finish anniversary-ing this probably till next October. Obviously, we feel strong about our strategy and think that we can offset some, maybe all, of that apparel business as we go forward with the shared categories, and that is the strategy. As we think about the international opportunity, we have already put things in place to help us to better service our international customer through our domestic website. We do believe that's an opportunity and something that we can talk more about in 2015.

Thanks, Sharen, and thanks, Ike.

Your next question comes from the line of Susan Anderson with FBR Capital Markets.

I was wondering at the Analyst Day you talked about doing a better job on the BBW promo in the third quarter. Is there potential for this in the fourth quarter also? And maybe if you can talk a little bit about the opportunity better.

I'm sorry, Susan. It's Nick. Would you mind repeating the question? It's hard to hear you.

Sure, yes. I was wondering if you could talk a little bit about how you're kind of changing up the BBW promos. It sounds like you did a much better job in the third quarter and maybe if there's opportunity in the fourth quarter.

Sure. We -- based on the customers' acceptance to product and the trend that we were on during the last few months, particularly from late spring, it's allowed us to pull promotions back slightly. So we've been slightly less promotional than we were last year, which is a good thing, and has helped from a margin rate and just from a brand equity perspective. As we go into the fourth quarter, it'll be -- we're planning at this juncture for it to be a comparable level of promotional activity but expressed in a different way so it feels different to her. So it should be a comparable amount but feel different in terms of cut-through as we think about how promotional the marketplace is going to be at that time.

Thanks, Nick. And thanks, Susan.

Your next question is from the line of John Morris with BMO Capital Markets.

Martin, question for you. Checking on this, I believe, you guys are turning on global e-comm in local currency very soon if not already. Would you anticipate a nice uptick in performance from that? And can you -- really about fulfillment, can you handle fulfillment of that out of Columbus? What plans are you considering on a go-forward basis as that progresses? And when would you all look to turn on e-commerce in local language as well?

Thanks, John. I think we're going to have Sharen take that question.

Listen, I think that we have turned on and been very excited about the results that we're seeing so far with us really trying to make it much easier for our customers internationally to -- as we talk about the local currency. As we think, as I've said before, we believe there's a big opportunity within our e-commerce strategies from an international perspective. That is something that we will talk more about in 2015.

And fulfillment?

Same thing. Right now, we're fulfilling everything from the U.S. just as we do all of our international properties. And as we go forward, we're looking at other opportunities, and that's something we'll talk more about in 2015.

Thanks a lot, John.

Yes, your next question comes from the line of Matt McClintock with Barclays.

Sharen, you talked a little bit about the exit of makeup, and I was just wondering if you could remind us where we're at in terms of the Beauty business -- in terms of the margin opportunity for the Beauty business. How much margin opportunity potential do we have going into this holiday season and maybe next year to improve profitability there. And then when you think about core drivers of the Beauty business going into holiday season, can you maybe just talk about what you're most excited about?

Thanks, Matt. Number one is that we have a very large profitable Beauty business today. And as we think about the opportunities that we have going forward, our total focus is on fine fragrance. And we have seen increases within our fine fragrances. Our launches have been bigger and better than they ever have been, so we are excited about the opportunity as we go forward. When I think about the core drivers going into this holiday, number one is going to be all the new fragrances that we've launched plus the fragrances that have been in our foundation. And when I think about those fragrances, such as Tease, Dream Angels, those we are actually seeing some high-single-digit, double-digit increases in those fragrances, plus the new fragrances, which we just launched, Scandalous, which was the largest fragrance launch we've ever had. So we feel very confident in terms of that business as we go forward. The second core business that we have is the gifting business, and that gifting business is always a little hard to predict as that it really happens in the last -- in the first 3 weeks and going into the last week of Christmas. So we have some early indicators, but we're still cautiously optimistic as we think about going into the holiday season.

Great. Thanks, Sharen. And thanks, Matt.

Your next question is from the line of Kimberly Greenberger with Morgan Stanley.

Stuart, it seems like the third quarter profitability has really moved meaningfully higher as the revenue in the quarter has gone from about $2 billion a few years ago to $2.3 billion. Your operating income in the quarter has almost doubled with that. It would seem only 15% move higher in the revenue picture. So I'm wondering, is it just that you're better able to flow more of the incremental revenue to the bottom line in the quarter, better able to cover your fixed expenses? Or have you taken a different philosophy to sort of expense management and really tightening up the P&L?

Thanks, Kimberly. You know what, to be honest, I wouldn't say that there's a "different philosophy" on third quarter expenses. I think, as you mentioned in your question, it's really been driven by revenue growth and healthy margins, merchandise margins, in the third quarter. You're right to point out that we've grown the revenue and the profit in the third quarter meaningfully over the last few years. And Sharen or Nick could elaborate on this, but one of the things that the business is trying to do is to make the most of all meaningful selling periods, including those out of traditional holiday. And I think the business did some very smart things, VS and BBW, this third quarter to drive volume and profit. But in terms of, is there a different philosophy or mindset around expenses in the third quarter versus the rest of the year? No. It's to manage, obviously, expenses with discipline and forcing tradeoffs, but I wouldn't say that there's anything unique in the third quarter with respect to that. It's really been about volume and trying to make -- create events and maximize sales and margin in the third quarter.

Thanks, Kimberly.

Your next question is from the line of Barbara Wyckoff with CLSA.

Could you -- this is for Sharen. Could you update us on how many stores or malls have full PINK assortments this year versus last. And also, how many Victoria's Secrets have full active assortments versus last year.

Sure. We haven't really moved the needle a lot in terms of full assortment PINKs in Victoria's Secret stores where the opportunity has been -- has had -- we actually moved the PINK into freestanding real estate. So today, we have -- when we think about it, more than 800 stores do not carry all of the lingerie assortments, and, more than 650 stores do not carry all of the PINK assortments. Now we have grown the PINK real estate by opening up the full PINK -- the freestanding PINK stores. When I think about the Sport business, we will have the full assortment in about 181 stores for fall. And then we have the bra assortment, just a very small bra assortment in most -- in the rest of all the stores, but it's only about a cabinet to 2 cabinets, and we do believe that there's a lot of opportunity. So therefore, you can surmise by that, that we've proven, with some real estate expansion, that we have been able to grow the business and return on that investment. And we are not seeing the end of the light of that tunnel yet and still look forward to these opportunities that we do have in front of us.

Thanks, Barbara.

Your next question is from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

Stuart, could you discuss the key drivers behind the increase in free cash flow guidance this quarter?

It'd be the increase in net income and a tighter view on the ending inventory balance for the end of the year would be the 2 most significant drivers. So it'd be the flow-through, the Q3 beat, and again, tightening up working capital assumptions for the whole year.

Thanks, Lorraine.

Your next question is from the line of Jennifer Black with Black & Associates.

I wanted to know -- I know you've been focused on increasing productivity of your sales associates, both at Victoria's Secret and BBW. Can you talk about how you're measuring your associates today? Is it sales per hour? Are you changing incentives? If you could each talk about what you're doing to empower your sales associates and increase their productivity. And then I also wondered if Alshaya and your -- or your other franchisees are also utilizing the same strategies.

Jennifer, thank you for the question. As we think about our stores and our selling associates is that, obviously, we want everyone -- everybody to have careers with Victoria's Secret, and they are. We are so fortunate to have such passionate sales associates. When we think about productivity, we really do measure it by our SPAH, they're selling productivity per average hour, and really looking at how do we make sure that we have our best people, our most productive people where we have the most traffic. And it's something that we have the capability of measuring, we have the capability of tracking our sales associates' sales. Therefore, we can coach them, we can ask them what training that they need so that we can give them the tools necessary to help them to be more productive. And it's an ongoing initiative, and we're just at the very beginning, at the beginning of the beginning. And as you know that at this time of year, it -- at holiday, we start to hire new seasonal people. So we started it, and we're going to kind of continue to play with it through holiday, but then it will really be even more in a detailed manner as we start for spring 2015. So we are very excited about the opportunity that we have within our total selling organization.

Great. And Nick?

It's a comparable story, not much different. We continue to test all sorts of different things to drive different results, which is part of our core DNA of how we run the business, but it's a comparable story.

Is this newer for you?

Is it newer for BBW?

Yes.

Yes -- I mean, we're -- fundamentally, we're really watching very closely to what Sharen is doing with the business, trying to take the learnings from that. And then we're a slightly different business model. We're obviously smaller stores and so trying to understand which pieces of that equation make the most sense for us. So we're in a fortuitous situation where we can do some of our own things and get great learnings from Sharen's business.

And as you know, internationally, our goal is to operate a replication model. So fundamentally, the way that the stores operate overseas is the same as the way that they operate in North America. With that said, we do experience different cultures, different pay scales, different employment norms, different legal frameworks, et cetera. But that mean that our partners do, in fact, manage the way that they operate their people independently from the way that we do.

Great. Thanks, Jennifer.

Your next question is from the line of Paul Lejuez with Wells Fargo Securities.

Now that you've had some of the VSBA stores open for a couple of years, can you talk about the comp performance of some of the older classes? And also wondering, as you bring in new partners, I'm just wondering if the terms of the arrangements have changed just from an economic perspective since you started down that path.

Yes, thanks, Paul. I'll take that. We'll have 300 VSBAs by the end of this year, and we take so many different cuts at performance of that business. We look at it by age, we look at it by geography, we look at it by size. We look at it every which way you can see. And the patterns are remarkably consistent. We do see positive comp growth, and we do see great signs of encouragement that the new stores get even better than the original stores. So there isn't really much of a story to tell there, Paul. In terms of new franchise partners, well, we've already filled most of the world with the partners we're working with. So we're not actively out there seeking new partners. But I would tell you that we're pleased with the terms that we went with originally, and we don't anticipate any change to those with new partners.

Thanks, Paul.

Your next question is from the line of Christian Buss with Credit Suisse.

Yes, so I was wondering if you could talk a little bit about some of the initiatives you have towards faster lead times and how much more progress you have to make there. Maybe the way of asking it is, what inning are you in, in the game towards getting a fast-turn supply chain in progress.

Great. Thanks, Christian. So we'll start with Sharen.

Christian, as we started this journey, we have learned so much, and we have made so much progress. And I still think that we have much more to do. I think when we think about the back end of that just cutting and selling goods and getting goods here and the thinking about testing and reading, reacting; very, very good progress. When I think about the opportunities to continue how we think about designing on the front end and raw materials, we still have a lot more to do and a lot more opportunity, which I'm obviously very excited about. So the inning question. So I guess, we're in, I don't know, 6, how many innings are there in a baseball game?

Nick, do you have anything you want to add?

Yes, I think, Christian, it's a good question. And I think the easiest way for me to answer that, if you look at our business in September and October, we designed a September floor set to live for about 4 weeks, and it lived for about 9 weeks. And the way we were able to do that was by leveraging our speed model so we could replenish into that and maximize the opportunity. So I think the question is less about how much faster can we go. The question for us is probably how much more breadth of assortments are we able to put on to that speed model that will allow us to have a greater degree of the business being faster versus the business being faster, if that makes any sense.

Your next question is from the line of Betty Chen with Mizuho Securities.

I was wondering, Sharen -- sorry, if I missed it earlier, but I think Nick had addressed maybe some of his opportunities for the fourth quarter and then spoke to maybe promotions being flattish year-over-year. Can you talk to us about that for Victoria's Secret and also where we are in terms of margin and what opportunities you see longer term?

Thank you, Betty. I think, number one, we have taken all the necessary steps and the learnings from last year to be very well prepared and very, very well positioned for the fourth quarter. Last year, we were promotional. This year, we have a lot of things planned. We have things that we've really engineered. We're going to read the business day-by-day. Some things we may not have to. Some things we may -- if we need to drive more traffic, and most of these have been margin engineered. So we're going to take it one day at a time. We have a lot of contingencies in place, and we're going to take full advantage of maximizing this holiday season the best that we can.

Thanks, Sharen, and thanks, Betty.

Your next question is from the line of Mark Altschwager with Robert W. Baird.

Could you talk about your early reads from the Perfect Christmas campaign at BBW? How is that assortment performing versus your expectations? And similarly, we've seen the greater focus on accessories at VS. Any thoughts you can share on the consumer's reaction to that as well would be great.

Okay. Mark, we'll start with Nick on the question about Perfect Christmas.

So we've literally just launched that. And as we said in the opening comments, we're excited with our assortment in terms of product acceptance. We've had good momentum during the last few months, and obviously, there's a long way to go as it relates to the rest of November and December. But so far, we're happy with her reaction to Christmas specifically.

Thanks. Sharen?

In terms of the accessory business, we've always been in the accessory business and really started trying to maximize it even more so last fall season with the launch in Victoria. We've seen nothing but -- us to be able to gain momentum in that business domestically, and I'll let Martin talk about from an internal perspective as well, but it's a business that we still think that has a lot of legs.

Yes, it's a great business for us internationally. It represents about 1/4 of our sales in the VSBA business, business that responds well to fashion and newness and to the core equities of the Victoria brand. Yes, a good business.

Thanks, guys.

Your next question is from the line of Jeff Stein with Northcoast Research.

One question for Stuart. Looking at the international business, you've got kind of an eclectic mix of revenues there with stores, with royalties and with wholesale, and I'm wondering if you could just kind of give us some guidance in terms of how we should think about modeling each of those revenue streams because if you look at the sequential pattern of margins, you've been down -- obviously up significantly year-over-year, but you've been down sequentially. And as we kind of move ahead with the mix of growth in franchise stores versus company-owned, how should we think about modeling margins.

Yes, I think the best overall advice that we would have for you, Jeff, is to look at our guidance that we're giving on store growth and to develop an understanding, and we've certainly tried to be helpful in that regard, an understanding of what the franchise economics look like versus what company-owned economics would look like, particularly in a startup mode in different countries. And -- but really, the key source of input, if you will, would be our guidance that we've -- Martin gave a few weeks ago at our annual update about our growth in stores and then, again, understanding the sources of revenue and the margin profile of the franchise business, which is different than a company-owned business. But in terms of breaking that down in detail on the call, the best advice we can give you is to really follow that store growth and use your understanding of the different economic profile of those 2 business forms would be my best advice.

Thanks, Jeff.

Your next question is from the line of Thomas Filandro with Susquehanna.

So for Sharen, just a quick question on the port congestion, whether you're seeing any receipt-related issues or cost there. And Nick, if you could, I think you continue to experience very strong DTC growth. I was curious if you could give us a snapshot of the channel profit performance for the quarter, how that compares to last year and possibly, as well, how it compares to the brick-and-mortar business.

Zero port congestion for Victoria's Secret.

Okay. Thanks. Nick?

The profitability is about comparable, Thomas. So we continue to see nice top line growth as we mentioned earlier on in the speech at around 16%. It's a comparable profitability. And the real driver for us in that business, without a doubt, is we have a great relationship with the customer, and the opportunity to tell really good emotional stories and lift that side of it is kind of first and foremost. And as a nice outcome, we continue to drive nice sales growth in that. But fundamentally, it's a comparable level from a profitability perspective.

Thanks very much, Tom.

Your next question is from the line of Simeon Siegel with Nomura Securities.

This is actually Gene Vladimirov on for Simeon. I was wondering if you could give us some color around the currency environment, how that may have effected you, whether you guys have seen a slowdown in sales abroad. And then following up on that, maybe any changes, either in the short term or in the long term, regarding the international expansion.

So with respect to currency, the good news for us is that it doesn't impact us as much as it does many other retailers. And that's in part because much of our international business is done on a franchise basis, and so the economic flow into our business is a royalty off the top versus the full amount of retail sales. Obviously, there's been pressure, generally speaking, related to business in Canada, some pressure economically on the business. It's been partly offset by some favorability, at least in some periods, related to the British pound. But the most important thing I'd want to register through all that is the impact on our business, to this point, really hasn't been that material. It's been a small drag on the business but not in the context of the overall company something that I would describe as material.

Thanks, Simeon (sic) [ Gene ].

Your next question is from the line of Anna Andreeva with Oppenheimer Capital.

My question is on La Senza. I was hoping to get some color on just the opportunity to revitalize that business. I think you mentioned at the Analyst Day a potential for store growth in the U.S., just some update there. And Stuart, inventories have been so well managed, I'm not sure if you mentioned, but how should we expect inventories ending 4Q?

Thanks, Anna. We'll start with Martin for La Senza.

Yes, hi, Anna, thanks for the question. Yes, La Senza continues to be a work in progress. I will tell you that we had a decent quarter in quarter 3. Sales were up, margin was up, inventory was well down. So we go into the season with decent momentum and optimism. But as everybody knows, we make our money in the fourth quarter, so it's all about what's in front of us rather than what's behind us. So I'd say I'm cautiously optimistic and looking forward to the fourth quarter. As far as stores in the U.S. are concerned, this time last year, we were expecting to open stores in 2014. Holiday didn't go the way we wanted it to. So we canceled that, and we said no, we won't do it. The same would be true for now. We'll see how holiday plays out, and we'll revisit that decision in January or February 2015.

With respect to inventory at year end, on a per-foot basis, we believe we'll be down mid-single to high single. On a 2-year basis, about flat, and that's in line with sales per foot on a 2-year basis as well. So we feel like the inventories are in good shape, and we've done a good job balancing, obviously being in stock with making sure our assortments are fresh, and we have good ability to read, react and chase.

Thanks, Stuart, and thanks, Anna.

Your next question is from the line of Omar Saad with OSI Group (sic) [ ISI Group ].

Wanted to ask about the fashion show in a couple of weeks in Europe. I'm sure it's the biggest PR kind of event you've done internationally to date. But can you kind of frame for us what sort of marketing activities or PR activities have been in place for the brand internationally to this point? Or does this really mark the kickoff of a more sustained significant and aggressive brand campaign outside of the U.S., if you could kind of put that into perspective. And then potentially, as you look down the road, have you started thinking about fashion shows maybe in other parts of Europe or even Asia in future years?

This is Sharen, Omar. When I think about the fashion show, we always have -- we have a great partner with CBS. It is -- we have international PR that we're working on. And it's even if -- no matter where the fashion show is, whether it's in the U.S. or whether it's international, it is one of the highest-rated shows and watched shows around the world. And we have continuing pickup in the press far beyond and it has far reach beyond holiday. So we have a very exciting lineup, as I spoke earlier about the entertainment this year, getting great buzz from the press in London. We have, obviously, in-store events that we plan. We have watch parties that we plan not only internationally but also domestically. So we are very excited about this international show. And this is actually the second time that we have gone international with the show. The first show was in Cannes. So it is -- obviously, we're very proud of the fact that we've been able to develop the show, and so we're very excited about it. When you think about the opportunities of where next year's show will be, the world is our play station. So you never know. So stay tuned.

Thanks, Sharen.

Your final question comes from the line of Roxanne Meyer with UBS Securities.

Sort of a follow-up on Kimberly's question earlier. Years ago, you earned just a few pennies in 3Q. And now clearly, you've grown 3Q to be much more important. And Stuart, as you mentioned, increasing volumes has been a part of that. And your ability to leverage your speed model really seems to be at an inflection point. So I'm just wondering how your speed model is changing the way you think about quarterly contribution to full year sales and profits, and if you think it could shift it all over the next few years.

Yes, I mean what I would -- I don't -- while the speed initiative and the work that we've been describing to you over the last few years and that Sharen and Nick commented on again today, that drives value throughout the year. Certainly, and it's a stat we shared a few weeks ago, going into the fall season being 90% open, this is on the 1st of August, we were 90% open for holiday business in terms of open to buy, that's a very powerful thing. But I wouldn't say that I think that benefits the third quarter more than it does the fourth quarter or the first quarter or the second quarter. Obviously, the bigger benefit would be where you do more business. And so the tool is an important one. But I think at the end of the day, economically, it was driven -- the significant improvement in the third quarter is we've done a nice job growing volume. And we've done so with healthy margin rates. The speed tool in and of itself has application throughout the year. And in many ways, is most important where we do the most business. So...

Great. Thanks, Stuart. That concludes our call today. We want to wish everybody a very happy Thanksgiving, and we appreciate your interest in L Brands.

Thank you again for participating in today's call. You may now disconnect.